Edited version of your written advice

Authorisation Number: 1012825454040

Date of advice: 17 June 2015

Ruling

Subject: Capital gains tax

Question 1

Will you make a capital gain (or loss) when the property is transferred to your sibling?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2015.

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

You co-signed a mortgage with your sibling as they were unable to obtain a loan in their sole name. A financial advisor suggested if the property was under both your names your sibling could borrow money.

In 19XX you assisted your sibling to obtain a loan to purchase a property.

You have never lived in the property.

Your sibling has lived in the property since its purchase and continues to live there.

You live in another property with your family.

You did not assist with the payment of the deposit.

You have not made any repayments on the mortgage.

You want to remove your name from the property title deed.

You claim your sibling is the beneficiary of the property and you are only a trustee holding the interest in the property on their behalf.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 100-20.

Income Tax Assessment Act 1997 section 104-10.

Income Tax Assessment Act 1997 section 106-50.

Reasons for decision

Section 100-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or capital loss if, and only if, a CGT event happens to a CGT asset.

Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. It states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if beneficial ownership remains unchanged. Accordingly, it is the beneficial ownership of the property that is of importance.

Holding a property in trust

When considering the disposal of a property, the most important element in the application of the CGT provisions is beneficial ownership. It must be determined who is the beneficial owner of the asset.

In some cases, an individual may hold legal ownership interest in a property for another individual in trust, such as occurs under a bare trust arrangement. 

A bare trust is one where the trustee has no active duties to perform. Gummow J said in Herdegen v. Federal Commissioner of Taxation (1988) 84 ALR 271 at 281:

Today the usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party.

Broadly, the provisions dealing with capital gains and losses treat an absolutely entitled beneficiary as the relevant taxpayer in respect of the asset. It is considered that the test of absolute entitlement is based on whether the beneficiary can direct the trustee to transfer the trust property to them or at their direction. While the existence of a bare trust may be a good indicator that a beneficiary of the trust is absolutely entitled, it is not necessary to establish that the trust is a bare trust in order to establish absolute entitlement. Likewise, the existence of a bare trust does not lead automatically to the conclusion that a beneficiary of the trust is absolutely entitled.

Draft Taxation Ruling TR 2004/D25 discusses the concept of 'absolute entitlement' and states, at paragraph 10, that:

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

Further, at paragraphs 21 and 22 of TR 2004/D25 it states;

A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction

As a sole beneficiary, in respect of an asset, has the totality of the beneficial interests in the asset, they automatically satisfy the requirement that their interest in the asset be vested in possession and indefeasible.

Section 106-50 of the ITAA 1997 explains that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it. In these cases, no CGT event will happen when the legal title in the asset is transferred to the beneficiary as the beneficiary is already considered to be the 'owner' of the asset. The beneficiary would be considered to be the 'owner' of the asset from the time they became absolutely entitled.

Application to your circumstances

It is accepted that the arrangement between yourself and your sibling amounts to a bare trust arrangement. In this case we consider that while you were the legal owner of the relevant property, your sibling has always been the beneficial owner of the property. It is considered that you have never had any beneficial ownership in the property and merely hold the title on behalf of your sibling who is absolutely entitled to the property. You did not provide any funds for the purchase of the property, nor did you receive any income from the property.

Beneficial ownership will not change when the property is transferred into your sibling's name. Accordingly, there will not be a CGT event for you and therefore you will not make a capital gain or loss when the property is transferred to your sibling.